CFA level 1 notes
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Contents
Book 1 Ethics and Professional Standards and Quantitative Methods...........................................................................3
Reading 1...............................................................................3Standard : Professionalism...................................................3Standard : ntegrit! of Ca"ital Markets.................................#Standard
: $uties to Em"lo!ers...........................................1&Standard nvestment 'nal!sis( recommendations and actions............................................................................................1)Standard
: Res"onsi,ilities as C-' nstitute Mem,er or Candidate.............................................................................1#Reading ntroduction to /PS..............................................1%Reading + 0he time value of the mone!..................................)&Reading # $iscounted Cash -lo '""lications........................)&Reading % Statistical Conce"ts and Market Returns................)1Reading 2 Pro,a,ilit! Conce"ts.............................................))Reading Common Pro,a,ilit! $istri,ution............................)3Reading 1& Sam"ling and estimates......................................)3Reading 11 4!"othesis 0esting..............................................)+Reading 1) 0echnical 'nal!sis...............................................)%
Reading 13 $emand and Su""l! 'nal!sis: ntroduction...........)Reading 1 $emand and Su""l! 'nal!sis: Consumer $emand.33Reading 1+ $emand and Su""l! 'nal!sis: 0he 5rm.................3+Reading 1# 0he 5rm and Market Structures............................3Reading 1% 'ggregate 6ut"ut( Prices( and Economic groth...+Reading 12 7nderstanding Business C!cle..............................+)Reading 1 Monetar! and -iscal Polic!...................................+%Reading )& nternational 0rade and Ca"ital -los...................#)Reading )1 Currenc! E8change Rates.....................................##
Reading )) -inancial statement anal!sis: 'n ntroduction.......#Reading )3 -inancing Re"orting Mechanics............................%&Reading ) -inancial Re"orting Standards.............................%1Reading )+ 7nderstanding ncome Statements.......................%3Reading )# 7nderstanding Balance Sheets.............................%#Reading )% 7nderstanding Cash -lo Statements..................%Reading )2 -inancial 'nal!sis 0echni9ues..............................21Reading ) nventories.........................................................2)Reading 3& ong;lived 'ssets................................................2Reading 31 ncome 0a8es......................................................2%Reading 3) <on;Current ia,ilities.........................................2Reading 33 -inancial Re"orting Qualit!: Red -lags and
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#)$vidence of misconduct%)&eport by a CFA e'am proctor T(e designated ocer may decide:1)*o disciplinary sanctions are appropriate!)To issue a cautionary letter#)To discipline t(e member or candidateIf t(e candidate does not accept t(e proposed sanction+ t(e matteris referred to a (earing panel composed of (earing panel,Sanctions may include condemnation by member-s peers orsuspension of candidate-s participation in t(e CFA program T(e code of et(icsSi' components:1)Act in an et(ical manner!)Integrity is paramount and clients al.ays come /rst#)0se reasonable care be independent%)2e a credit to t(e investment profession3)0p(old capital mar4et rules and regulations5)2e competent
Standard : Professionalism
A. Knowledge of the Law
1) 0nderstand and comply .it( all la.s+ rules+ and regulations 6including Code and Standards) of any government+ regulatory agency+ or association governing professional activities!) Comply .it( more strict la.+ rule+ and regulation#) 7o not 4no.ingly assist in violation+ ot(er.ise dissociate from activity,
8uidance
1)Most strict2)First, notify supervisor or compliance)May confront wrongdoer directly!)"issociate if necessary#)$naction may %e construed as participation &
-./0-1"
)')(o reuirement to report violations to governmental authorities, %ut this may %e appropriate in certain cases
*ecommended +rocedures
1)Keep informed, regularly review written compliance procedures, maintain files2)ee- compliancelegal advice as needed)/ncourage firms to adopt code of ethics!)"istri%ute information internally on applica%le laws and regulations#)0ave written procedures for reporting suspected violations
')
Mem%ers strongly encouraged to report violations %y other mem%ers
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. $ndependence and %3ectivity
1) 0se reasonable care+ 9udgment to ac(ieve and maintain independence in professional activities!) 7o not oer+ solicit+ or accept any compensation t(at could compromise independence or ob9ectivity
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8uidance
1);odest gifts o4ay
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!)7istinguis( bet.een gifts from clients and gifts from entities trying to in<uence a member=s be(avior
3AMa! acce"t gift from clients;disclose to em"lo!er;get "ermission if gift is for future. =hen "ossi,le( "rior to acce"ting ,onuses or gifts from clients( mem,ers should disclose to em"lo!ers such ,ene5ts oDered ,! clients. f noti5cation is not "ossi,le "rior to acce"tance( mem,ers must disclose to em"lo!ers ,ene5ts "reviousl! acce"ted from clients.
%);embers responsible for (iring outside managers s(ould not accept travel+ gifts+ or entertainment t(at could impair t(eir ob9ectivity3)Investment ban4ing relations(ipsdo not bo. to pressure to issuefavorable researc(
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5)For issuerpaid researc(+
*at fee structure is "referred mustdisclose
>);embers .or4ing for credit rating /rms s(ould avoid in<uence byissuing /rms?)0sers of credit ratings s(ould be a.are of t(is potential con<ict@)2est practice is for analysts to pay for t(eir o.n commercial travel to /rms being analyed or to /rm events
&ec
ommended +rocedures
1)+rotect integrity of options 4 reports
should reflect un%iased opinion
2)Create a restricted list
)*estrict special cost arrangements!)Limit gifts5
clear value limits by firm
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)#)e careful with $+ share allocations
6. Misrepresentation
7o not ma4e misrepresentations relating to investment analysis+ recommendations+ actions+ or ot(er professional activities A mispresentation is any untrue or omission of a fact or any statement t(at is ot(er.ise false or misleading,
8uidance
1)Standard covers oral+ .ritten+ or electronic communications!)7o not misrepresent quali/cations+ services of self or /rm+ or performance record+ c(aracteristics of an investment
3A $o not guarantee a certain returnA<o "lagiarism;ritten( oral( or electronic communications
&ec
ommended +rocedures
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1)Firms can assist employees by providing .ritten list of t(e /rm=s available services and a description of t(e /rm=s quali/cations!)
Maintain records of materials used to "re"are research re"orts( and 9uote source( e8ce"t for
Brecognied /nancial and statistical reporting servicesB,
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3AModels and anal!sis of others at the 5rm ma! ,e used ithout attri,ution
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,ut the re"ort ritten ,! another anal!sts em"lo!ed ,! the 5rms cannot ,e used as another anal!stFs ork.
%)S(ould encourage /rm to establis( procedures for verifying mar4eting claims of t(ird parties recommended to clients
". Misconduct &Mummy7s rule)
7o not engage in any
"rofessional
conduct involving dis(onesty+ fraud+ deceit+ or commit any act t(at re<ects adversely on professional reputation+ integrity+ or competence, Fail to act .(en required by one-s professional obligations+ suc( as neglecting to perform due diligence related to investment recommendations+ violates ;isconduct,
8uidance
T(is Standard covers conduct t(at may not be illegal+ but could adversely aect a member=s ability to perform duties
&ec
ommended +rocedures
1)Adopt a code of ethics to which every employee must adhere2)"isseminate a list of potential violations and associated disciplinary sanctions
#)
Conduct background checks on potential employees
44 loo- for good character and eligi%ility to wor- in the investment industry
Standard : ntegrit! of Ca"ital Markets
A. Material (onpu%lic $nformation
;embers in possession of nonpublic information t(at could aect aninvestment=s value must not act
or cause someone else to act
ont(e information
8uidance
1)B;aterialB
)
if disclosure of information .ould aect a security=s price or if an investor .ould .ant to 4no. before ma4ing an investment decision!)If price eect is ambiguous+ information may not be considered material
3A
$'tends to info suc( as
u"coming rating change( in*uential anal!sis to ,e released
%)Information is nonpublic until it (as been made available to t(e mar4etplace,
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material nonpublic,3)Information made available to analysts in t(e conference call is considered nonpublic until it is made available to investors in generalPage
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5)BActB includes related s.aps and options+ mutual funds .it( t(e security
%A
If you possess material nonpublic information+
act as !ou ould if !ou did not kno
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mosaic theor!
?);osaic T(eoryDno violation .(en an analyst combines
non;material non;"u,lic
information .it( public information to reac( conclusion
&ec
ommended +rocedures
1) $nformation %arrier or 8
firewall
8 is recommended to control interdepartmental communications2) $nformation %arrier includes
use of restricted list
) *eview employee trades!)
Increase review/restrict proprietary trading
while firm is in possession of material nonpu%lic information
. Mar-et Manipulation
7o not engage in practices t(at distort prices or arti/cially in<ate trading volume .it( intent to mislead mar4et participants
8uidance
1)
7o not engage in transactionbased manipulationgive false impression of activityEprice movement gain dominant position in an asset to manipulate price of t(e asset or a related derivative
!)
7o not distribute false+ misleading information
Standard
Ⅲ
: $uties to Clients
A. Loyalty
,
+rudence
,
and 6are
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1) "uty of loyalty to clients4act with reasona%le care and e9ercise prudent 3udgment2)
Act for benefit of clients and place their interests before employers or own interests
) "etermine and comply with any applica%le fiduciary duty
8uidance
1) :a-e investment actions in client;s %est interests
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2) /9ercise prudence, care, s-ill, and diligence that a person familiar with such matters would use) Follow applica%le fiduciary duty!) 86lient8 may %e investing pu%lic#) Manage pools of client assets according to terms of governing documents')
Make investment decisions in context of total portfolio
<)
ote proxies responsibly and disclose proxy voting policies to clients
=)
!"oft dollars! must benefit client
&%ro-erage fee is client7s money, %ro-er will give something %ac-, which is called >soft dollars?)
&ec
ommended +rocedures
1)Follow rules and laws2)/sta%lish client investment o%3ectives)"iversify!)"eal fairly with clients4investment actions
#)$isclose all possible conflicts
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%)ote proxies in best interest of clients and ultimate beneficiaries&)'eep client information confidential()"eek best trading execution for clients
A
lace client interests first
. Fair "ealing
"eal fairly and o%3ectively with all clients when@ +roviding investment analysis Ma-ing investment recommendations :a-ing investment action /ngaging in other professional activities
8uidance
1)(o discrimination against any clients when disseminating investment recommendations or ta-ing investment action
2)*air does not mean e+ual,)$ifferent levels of service are okay as long as disclosed and do not disadvantage any clients
!)$nvestment recommendations@All clients must have fair chance to act on every recommendation$f client is unaware of recommendation change,
advise before accepting trade order
#) $nvestment actions@:reat all clients fairly44consider investment o%3ectives and circumstances"isclose written allocation procedures"o not disadvantage any clients when distri%uting 8hot8 issues
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new or old
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&ec
ommended +rocedures
1) Limit num%er of people aware of upcoming changes2) horten time frame4decision to dissemination) 0ave pre4dissemination guidelines!) imultaneous dissemination#) Maintain list of clients and their holdings')
$isclose trade allocation procedures
<)
&evie. accounts regularly to ensure fair
client treatment
=)
f 5rm oDers diDerent levels of service(
disclose this fact toall clients
@)
$eviations from strict "ro rata allocation of P6 are sometimes oka! Ge.g.( minimum ,lock si>esA
Include allocating pro rata on the basis of order size, not account size. All clients participating in the block trade should receive thesame execution price and be charged the same commission.
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selective disclosure
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6. uita%ility
Bhen in advisory relationship with a client@1)Ma-e reasona%le inuiry as to client;s investment e9perience, ris-return o%3ectives, financial constraints prior to ma-ing any recommendation, or ta-ing investment action
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2)-pdate information regularly
)/nsure investment is suita%le to client;s situation and consistent with written o%3ectives %efore recommending an investment or ta-ing investment action
.)ook at suitability in a portfolio context
#)Bhen responsi%le for managing a portfolio to a specific mandate, strategy, or style, only ma-e recommendations or ta-e investment actions that are consistent with the stated o%3ectives and constraints of the portfolio
8uidance
1)Bhen in advisory relationship, gather client information at the outset and prepare$+ &investment policy statement)
2)-pdate I" at least annually
)6onsider whether leverage &derivatives) is suita%le for client!)$f managing a fund to an inde9 or other mandate, invest according to mandate
&ec
ommended +rocedures
1) Bhen formulating $+ for client, -now the client;s@*eturn o%3ectives*is- tolerance2) "etermine the client;s constraints@Liuidity needs/9pected cash flows, investa%le funds:ime horiCon, ta9 considerations*egulatorylegal constraintsDniue circumstancesneeds
". +erformance +resentation
1) Bhen communicating investment performance information, ma-e reasona%le efforts to ensure that it is
fair0 accurate0 and complete
2) 6an
make brief presentation0 note limited nature0 and make detailed information available on re+uest
) "o not reuire compliance with E$+, auditing or verification reuirements.
8uidance
1)"o not misstate performance or mislead clients a%out investment performance2)"o not misrepresent past performance)+rovide fair and complete performance information!)"o not state or imply a%ility to achieve returns similar to those achieved in the past
&ec
ommended +rocedures
1)6onsider audience sophistication when presenting performance
2)-se performance of the weighted composite of similar portfolios
)$nclude terminated accounts as part of historical performance
.)Make all disclosures and maintain records1
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+reservation of 6onfidentiality
Keep current and prospective client information confidential, unless@ $llegal activities are suspected "isclosure is reuired %y law 6lient or prospect allows disclosure of the information
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8uidance
1)$n some cases it may %e reuired %y law to report activities to relevant authorities2):his standard
extends to former clients
)
/9ception@
May provide confidential information to C*A Institute for an investigation under rofessional Conduct program
4)
If applicable law requires members to maintain confidentiality, even if the information concerns illegal activities on the part of the client, members should not disclose such information.
*ecommended +rocedures
1) Avoid discussing any information received from a client
except to colleagues working on the same pro5ect
2) Follow firm;s electronic data storage procedures5 recommend adoption of procedures if none e9ist
Standard
Ⅳ
: $uties to Em"lo!ers
A. Loyalty
n matters related to employment, act for %enefit of employer and do not deprive &
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) employer of the advantage of s-illsa%ilities, divulge &
§¨
) confidential information, or otherwise cause harm to employer
8uidance
1) +lace client interests first %ut consider effects on firm integrity and sustaina%ility2) Mem%ers are encouraged to give employer a copy of the 6ode and standards) (o incentive or compensation structure that encourages unethical %ehavior
%) oyaltyIndependent Practice:%,1)If planning to engage in independent practice+
notif! em"lo!er of services "rovided( e8"ected duration( and com"ensation.
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.)A$o not "roceed ithout consent from em"lo!er.3A
0nderta4ing independent practice means
engaging in com"etitive ,usiness G,adA
+ as opposed to
making "re"arations to ,egin such "ractice GokA.
3) oyaltyeaving an $mployer:3,1)Act in best interest of employer until resignation is eective
+.)AEm"lo!er records on an! medium Ge.g. ( cell "hone( P$'( home com"uterA are "ro"ert! of the 5rm
3,#)Simple 4no.ledge of names of former clients is o4ay
donHt solicit "rior to leaving+.A <o "rohi,ition on use of e8"erience or knoledge gained at former em"lo!er
3,3)A departing employee is generally free to ma4e preparations to go into t(e competitive business before terminating t(eir 9ob as long as suc( preparations do not breac( t(e employee-s duty of loyalty,
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3,5)T(e member
must not take records or 5les
to a ne. employer .it(out t(e .ritten permission of t(e previous employer,5) oyalty"(istleblo.ing 6
9:
):5,1)Permitted only if it protects client or integrity of capital mar4ets
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5,!)*ot permitted for personal gain
Members and candidates are required to
disclose any compensation arrangement to their employers that involves performing tasks or services that their employers cancharge for.
Disclosure is required even if the activities occur duringnon-ork hours.
. Additional 6ompensation Arrangements &
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"o not accept gifts, %enefits, compensation, or consideration that competes with, or creates a conflict of interest with, employer;s interest unless
written consent
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) is o%tained from all parties involved.
8uidance
1)6ompensation and %enefits covers direct compensation %y the client and other %enefits received from third parties2)For written consent from 8all parties involved8, email is accepta%le
*ecommended +rocedures
1)Britten report to employer with details of proposed compensation in addition to normal compensation and %enefits2)"etails of incentives verified %y offering party
,)Include nature of compensation0 amount0 and duration of agreement
6. *esponsi%ilities of upervisors
Ma-e
reasonable
efforts to
detect and prevent
violations of applica%le laws, rules, regulations, and 6ode and tandards %y anyone su%3ect to your supervision or authority.
A supervisor!s responsibilities relate to detecting and preventingviolations b" an"one sub#ect to their supervision or authorit" regarding activities the" supervise. $ack had no a" of detectingand%or preventing &om from cheating during the '(A exam, if in fact that is hat he did, because it as an event he did not attend.
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should decline supervisor responsibilities until adequate procedures to detect and prevent violations of laws.
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8uidance
1)upervisors must ta-e steps to prevent employees from violating laws, rules, regulations, or the 6ode and tandards2)upervisors must
make reasonable efforts to detect violations
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)/sta%lish due diligence procedures for 3udging if recommendation has met reasona%le and adeuate %asis criteria!)"evelop measura%le criteria for assessing uality of research
#)Consider scenarios outside recent experience to assess downside risk of +uantitative models
')Ma-e sure firm has procedures to evaluate e9ternal advisers they use or promote, including how often to review<)Britten procedures of accepta%le scenario testing, range of scenarios, cash flow sensitivity to assumptions and inputs=)+rocedure for evaluating outside information providers including how often
7)8o need to dissociate from group research that the member disagrees with
. 6ommunication with 6lients and +rospective 6lients
1) "isclose %asic formatgeneral principles of investment processes used to analyCe investments, select securities, and construct portfolios2)
romptly disclose any changes that may affect those processes materially
) Dse reasona%le 3udgment in identifying which factors are important to investment analyses, recommendations, or actions!) $nclude those factors in communications with clientsprospective clients#)
$istinguish between fact and opinion
in presentation of investment analysis and investment recommendations') 6learly communicate potential gains and losses on an investment
8uidance
1)$nclude %asic characteristics of the security2)$nform clients of any change in investment processes
,)"uitability of investment6portfolio context
!)All communication covered, not 3ust reports
*ecommended +rocedures
3)
:he
inclusion or e9clusion of information depends on a case4%y4case review
2)
Maintain records
6. *ecord *etention
1) "evelop and maintain appropriate records to support investment analyses, recommendations, actions, and other investment4related communications with clients and prospective clients
8uidance
1)Maintain records to support research, and the rationale for conclusions and actions2)
9ecords are firm:s property and cannot be taken
when mem%er leaves without firm;s consent
,)
$f no regulatory reuirement,
C*A Institute recommends retention period of & years
*ecommended +rocedures
1) *esponsi%ility to maintain records generally falls with the firm2) 0owever, individuals must retain documents that support investment4related communications
#) "(en member c(anges /rm+ t(ey must recreate records frompublic sources and ne. /rm=s information 6can=t rely on memory ormaterials from old /rm)Page
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Standard
Ⅵ
: Con*icts of nterest
A. "isclosure of 6onflicts
1) Ma-e full, fair disclosure of
all matters that
could reasona%ly %e e9pected to impair independenceo%3ectivity, or interfere with duties to clients, prospects, or employer 2) /nsure disclosures are prominent, delivered in plain language
8uidance
1) "isclose to clients@1.1)All matters that could impair o%3ectivity4allow clients to 3udge motives, %iases1.2)For e9ample, %etween mem%er or firm and issuer, investment %an-ing relations, %ro-erdealer mar-et4ma-ing activities, significant stoc- ownership, %oard service2) "isclose to employers@2.1)6onflicts of interest4ownership of stoc- analyCedrecommended, %oard participation
+
financial and other pressures that may influence decisions2.2)6overs conflicts that could %e damaging to employer;s %usiness
Disclose to the emplo"er
an" outside development because this activit" could possibl" interfere ith her
responsibilities at current emplo"er. In setting up a ne )rm, she as not acting for the bene)t
of her emplo"er. *he should have informed the current emplo"er she anted to organize the hedge fund
and come to some mutual agreement on ho this process ould occur.
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isclosure of conflicts.
*ecommended +rocedures
1)"isclose compensation arrangements with employer that conflict with clients; interests2)$f firm does not permit disclosure, consider dissociating from the activity)Firms are encouraged to include compensation information in promotional materials
. +riority of :ransactions
1) $nvestment transactions for clients and employers must have priority over transactions in which a mem%er or candidate is the %eneficial owner 2)
$o not use knowledge of pending trades for personal gain
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8uidance
1)8eneficial owner8
)
has directindirect personal interest in the securities
2)Client0 employer transactions take priority over personal transactions ;including beneficial ownership)
)Family mem%er accounts that are client accounts must %e treated as other client accounts &you cannot ta-e advantage or disadvantage of them)
*ecommended +rocedures
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1) Firm;s compliance procedures should@
313) imit participation in e+uity I<s312) 9estrict purchase of securities through private lacements
2)
=stablish
%lac-outrestricted
periods
&to prevent the investment manager from front running).) /sta%lish reporting procedures and
prior clearance re+uirements
!) "isclose policies on personal investing to clients, upon reuest
6. *eferral Fees
"isclose to employer, clients, and prospective clients, as appropriate, any compensation, consideration, %enefit received from, or paid to, others for the recommendation of products or services.
8uidance
1)"isclosure allows clients and employers to evaluate full cost of service and any potential %iases
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disclose to clients whom he refers
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disclose to all clients1
2)"isclosure is to %e made
prior to
entering into any formal agreement for services)"isclose the nature of the consideration!)/ncourage firm to have clear policy regarding referral compensation#)Firms that do not prohi%it should have clear approval process
%)
Mem%ers should
update referral compensation disclosure to employer at least +uarterly
Standard
Ⅶ
: Res"onsi,ilities as C-' nstitute Mem,er or Candidate
A. 6onduct as Mem%ers and 6andidates in 6FA +rogram
"o not engage in any conduct that compromises the reputation and integrity of 6FA $nstitute or 6FA designation, or the integrity, validity, or security of the 6FA e9aminations.
8uidance
1) 6onduct includes@1.1)6heating on the e9am
åæ¬ç
1.2)"isregarding rules and policies or security measures related to e9am administration1.)Eiving confidential information to candidates or pu%lic1.!)$mproper use of 6FA designation to o%tain personal and professional o%3ectives1.#)Misrepresenting the 6FA $nstitute +rofessional "evelopment program or the +rofessional 6onduct tatement1.')"on;t disclose@1.'.1)Formulas tested or not tested on e9am
gè
1.'.2)pecific uestion information1.'.):opic emphasis on the e9am or topics tested
Ïé
.
*eference to 6FA $nstitute, the 6FA "esignation, and the 6FA +rogram
Bhen referring to 6FA $nstitute, mem%ership, designation, or candidacy, do not misrepresent or e9aggerate the meaning or implications of mem%ership in 6FA $nstitute, holding the 6FA designation, or candidacy in the 6FA program.
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8uidance
1) 6FA $nstitute mem%ership@1.1)6omplete +6 annually1.2)+ay mem%ership dues annually2) Failure to comply with a%ove results in an
inactive
mem%er status) Dsing the 6FA designation@Dse the mar-s 86hartered Financial Analyst8 or 86FA8 in a manner that does not misrepresent or e9aggerate the meaning or implications of holding the 6FA designation!) *eference to the 6FA program@!.1)6andidates may reference participation in 6FA program, %ut do not imply achievement of any type of partial designation
.12)
-ay to say 8passed all levels on first attempt8 %ut
do not imply superiorability
#) $mproper use of the 6FA mar-s@:he 86hartered Financial Analyst8 and 86FA8 mar-s must always %e used either after a charter holder7s name or
as ad5ectives0 not as nouns
*ecommended +rocedures
1) Ma-e sure that your employer is aware of the proper references to the 6FA designation and 6FA candidacy.
Reading ntroduction to /PS
=h! ere the /PS createdJ
Misleading practices included@
!"Representative accounts#"$urvivorship bias%"&arying time periods
>ho can claim compliance? ;
ŒêÜ
)
6ompliance is a firm4wide process that cannot %e achieved on a single product or composite.
6Ñëì
compliant
6ÑKí-t,
>ho benefits from compliance?
$nvestment management firms and prospective clients
Composites@
6onstruction and +urpose
A composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.
îïð
terminated portfolios
ñ
1) 6omposite4grouping of individual discretionary portfolios with same investment strategy, o%3ective, or mandate2) A composite must include all portfolios ¤t and past) that the firm has managed in accordance with this particular strategy) Eroupings must %e pre4identified
Pur"ose of @eri5cation
1)
@oluntaril! G
ΐ"
A
+ a /rm may (ire an independent t(ird partyto verify its claim of 8IPS compliance, Page
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discretionary and non-discretionary portfolios in compositesfor a minimum of *ve years or since *rm or compositeinception &*rm wide)
#)
Must add one !ear of com"liant "erformance histor! each!ear until a 1&;!ear record is "resentedA ' reorgani>ation of a 5rm does not "ermit an! alterationof historical com"osite results.<ine MaKor Sections of /PS
6
òó*_ôr.Ã
))Fundamentals of compliance issues for /rms to consider .(enclaiming 8IPS compliance+ including de/nition of /rm1)Input data must be consistent+ for full+ fair+ comparableperformance presentations!)Calculation met(odology certain met(odologies are requiredbe uniform in ;et(ods#)Composite construction create meaningful+ asset.eig(tedcomposites%)7isclosures certain info must be disclosed aboutpresentationEpolicies3)Presentation and reporting present investment performanceaccording to 8IPS requirements5)&eal estate provisions also apply to real estate investments+regardless of level of control t(e /rm (as over management of t(einvestment>)Private equity value according to 8IPS Private $quity GaluationPrinciples+ unless openend or evergreen fund 6t(en follo. regular8IPS)?"rap FeeESeparately ;anaged Account 6S;A) Portfolios asupplement to Sections J3 .it( speci/c reference to t(oseprovisions .(ic( don=t apply to "rap FeeES;A portfolios and someprovisions (ere t(at supersede t(ose in Sections J38IPS
-6õ
1) Trac4ing error for a composite!) Cumulative returns for bot( composite and benc(mar4#) equal.eig(ted means and median returns
Reading + 0he time value of the mone!
&equired interest rate on a security K ris4free rate L $'pected in<ation rate L 7efault ris4 premium L iquidity ris4 premium L ;aturity ris4 premium
Effectiveannualrate
=(
1
+
periodicrate
)
m
−
1
rdinary annuities 6
ö÷Ÿø
) Annuities due 6
ÒùŸø
)
，
úö÷ŸûZ，
P@
-@
üýF
T(e PG annuity function on t(e calculator set in M$*7N mode givesyou t(e value one period before t(e annuity begins,
C„两þyÿ
(
两þ中"Ÿ
Þ
应
Ï
目
中1
应
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oan amortiation sc(edule: $nding balance K 2eginning balance Principle Component To dra. a time line is a very good .ay to start,
Reading # $iscounted Cash -lo '""lications
Any discount rate less t(an t(e I&& .ill result in a positive *PG+ anda discount rate greater t(an t(e I&& .ill result in negative *PG,;at(ematically spea4ing+ t(e *PG met(od
assumes thereinvestment of a "roKectFs cash *os at the o""ortunit!cost of ca"ital
+ .(ile t(e I&& met(od assumes t(at
thereinvestment rate is RR
,
„
冲突
¸用
*PG
!
Private investor
full discretionary control over t(e timing andamount of .it(dra.als and additions to (is portfolios
;oney.eig(ted rate of return is an appropriate measure of portfolioreturns, 6
用yÿ
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I&&+
哪
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ßW
越
Q
+
占
Z
重越
F
)Investment manager
clients e'ercise discretionary control overt(e timing and amount of .it(dra.als and additions to t(e portfolio
time .eig(ted rate of return
standard
in t(e I; industry, 6
-U±ø
流影响
)Oolding period return K
Endingvalue
−
beginningvalue
+
cashflowreceivedbeginningvalue
1) 2an4 discount yield K
D F
∗
360
t
6
银
.
贴
±
收
Å
率
)
-
代表实际收
Å
+
缺点
：
1)
忽略复
…
!)
yÿ
基
%
面值
#)#5J
天
!) $ective annual yield 6
å
复
…
) K
(
1
+
HPY
)
365
/
t
−
1
#) ;oney mar4et yield 6
C$ e9uivalent !ield(
-å
!"复
…
) KOP Q 6#5JEt)$A and &
;;
are merely annualied versions of t(e OP,%)2ond equivalent yield refers to ! Q t(e semiannual discount rate,61L2$E!)
!
K 1L$A r 2$ K OP Q 6#53Et) 6de/ned in corporate /nance)
&he bond equivalent "ield for a semi-annual pa" bond is equal todouble the semiannual "ield to maturit" +
w
eective semiannual "ield and is
lower than the e+ective annual yield.
Reading % Statistical Conce"ts and Market Returns
Types of measurement scales1)
ominal scales
‡
#$%
+
ZCÚ
&
种
fund style
'(
1+!+#
H
#
6mutual fund investment style)!)
Ordinal scales
‡
)$%
+
(0Ì
*
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+
6under+ mar4et+ overPage
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Reading 2 Pro,a,ilit! Conce"ts
b9ective probabilities:
"rior "ro,a,ilit!
is determined using aformal reasoning and inspection process
em"irical "ro,a,ilit!
isestablis(ed by analying past data,Sub9ective probability:
least formal metho
d of developingprobabilities and involves t(e use of personal 9udgment, Consider an event t(at (as a probability of occurrence of J,1!3+.(ic( is oneeig(t(, T(e odds t(at t(e event .ill occur are 1E>,
Cov
(
R
i
,R
)
=
E
[
E
i
−
E
(
E
i
)
] [
R
−
E
(
R
)
]
}
X
„
Y率
"™
Z
á
[
T(e variance and standard deviation measure t(e dispersion+ orvolatility+ of only one variable, Covariance is a measure of (o. t.oassets move toget(er, Properties of correlation of t.o random variables:1)Correlation measures t(e strengt( of t(e linear relations(ipbet.een t.o random variables,!)Correlation (as no units,#)If correlation is J+ means no linear relations(ip+ but t(ere mayot(er relations(ip e'ists,
\
0
]
z
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gè"
ab
+
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cde
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f
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^_`
gè：
l
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Reading Common Pro,a,ilit! $istri,ution
gh
0
i
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Y率j数
：
0
# p
(
x
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#
1
+
∑
p
(
x
)
=
1
Cumulative distribution function 6C7F) for a random variable+ + maybe e'pressed as
F
(
x
)
=
P
(
$ # x
)
A binomial random 6
discrete distri,ution
) variable for .(ic( t(enumber of trials is 1 is called a 2ernoulli random variable,$'pected value
$
=
E
(
$
)
=
np
Gariance of
$
=
np
(
1
−
p
)
;ultivariate distributions bet.een t.o discrete random variables aredescribed using 9oint probability tables, Correlation is t(e featuret(at distinguis(es a multivariate distribution from a univariatenormal distribution, Correlation indicates t(e strengt( of t(e linearrelations(ip bet.een a pair of random variables,
0he #2N con5dence level interval for O is G
k
1
*
BC0
A
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.
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0he &N con5dence level interval for O is 0he +N con5dence level interval for O is G
k
)
*
BC0
A0he N con5dence level interval for O is G
k
3
*
BC0
A
1%
BClm
H
n
+
o
)þ0yÿ
值
,
op
þÔ
表
U value represents t(e number of standard deviation a givenobservation is from t(e population mean,
%
=
x
−
&σ
ognormal (as t.o features: positive s4e. t(e price is boundedfrom belo. by ero,
Safet!;5rst ratio
E
(
R
p
)
−
R
r
σ
p
( shortfall "ro,a,ilit!
bc÷
Q
Ô
表
õ°
Reading 1& Sam"ling and estimates
In strati)ed random sampling +
H
q
d
rst
, one divides the population into subpopulations and randoml" samples from ithinthe subpopulations.
1) Timeseries data consists of observations ta4en over a period of time at speci/c and equally spaced time intervals,!) Crosssectional data are a sample of observations ta4en at asingle point in time,#) ongitudinal data 6
u
$
数v
) are observations over time of multiple c(aracteristics of t(e same entity+
ZC
w
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87P+in<ation rate
@
%) Panel data 6
面
´
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) contain observations over time of t(e samec(aracteristic for multiple entities+
ZC
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debtEequityratio,Central limit t(eorem
中•
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sample siCe G,
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σ
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)tandard error of the sample mean
•
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.:hree desira%le properties of estimators@
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* .
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2.#=
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1)un4%iasness &
t
本
„
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S~„
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3
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6riteria for selecting the appropriate test statistics
：
Bhen sampling from a &
c¶ü
–t
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)@ mall sample &nIG)Large sample &nG) (ormal dist with -nown varianceJ4statisticsJ4statistics (ormal dist with un-nown variancet4statisticst4statistics (onnormal dist with -nown variance(AJ4statistics (onnormal dist with un-nown variance(At4statistics
—
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un-nown variance,
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variance,
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t test&
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Reading 11 4!"othesis 0esting
T(e null (ypot(esis is t(e (ypot(esis t(at t(e researc(er .ants tore9ect, T(e null (ypot(esis al.ays includes t(e Mequal toN condition,Page
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Test statistics K 6sample statistics (ypot(esied value)EStandarderror of t(e sample statistics Type V error:
JK
¹
6signi/cance level K probability of Type V error) Type W error
：TU
6Po.er of test K 1 probability of Type W error)
Å…
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±"
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p
,0sually+ P6Type V error) increases+ t(en P6Type W error) decreases, If you .ant t(em bot( to decrease+ you need to increase t(e samplesie, T(e Pvalue is t(e probability of obtaining a test statistics t(at .ouldlead to a re9ection of t(e null (ypot(esis+ assuming t(e null(ypot(esis is true, T(e Pvalue is t(e smallest level of signi/cance at .(ic( t(e null(ypot(esis can be re9ected, T(e smaller t(e p value t(e strongert(e evidence against t(e null (ypot(esis, P values close to erostrongly suggest t(at t(e null (ypot(esis s(ould be re9ected, P
值越
Tû
G
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越应É
JK
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1) :here are two t4tests that are used to test differences %etween the means of two populations. &:he differences in means test)1.1)
两种
Ê
æ"
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：
samples are
independent
5 populations are normallydistri%uted&
®
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两*0
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t test
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两种
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(
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assumethe population variances are e+ual
, and the sample o%servations are pooled.
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!) Paired comparisons 6t test): requires t(e sample data be normallydistributed samples are
de"endent
, 6T statistics is t(e averagedierence in paired observations divided by t(e standard error of t(e dierences bet.een observations)Page
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(onparametric alternatives to parametric tests+arametric(onparametric:est concerning a single meant4test, C4testBilco9on signed4ran- test:ests concerning differences %etweenmeanst4testMann4Bhitney D test:est concerning mean differences&paired comparison tests)t4testBilco9on signed4ran- test
#) C(isquare test
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$egree of freedom@ n63
+arametric tests rely on assumptions regarding the distri%ution of the population andare specific to population parameters. (onparametric tests are only used when the data are not suita%le for parametric tests.
/onparametric tests are primaril" concerned ith ranks, signs, or groups, and the" are used hen numerical parameters are not knon or do not meet assumptions about distributions. 0ven if theunderl"ing distribution is unknon, parametric tests can be used onnumerical data if the sample is large.
=xamples@ small sie sample coms from a non6normal distributionB data areranks rather than valuesB runs test0 to determine whether data are random1
:he spearman ran- correlation test can %e used when the data are not normallydistri%uted.
Reading 1) 0echnical 'nal!sis
A 4ey assumption of tec(nical analysis is t(at mar4et prices re<ectbot( rational and irrational investor be(avior, T(is implies t(at t(eecient mar4et (ypot(esis does not (old, 6It only cares about t(eprice and volume)
ÓU
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+
½
B
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,A
dontrend line
is constructed by dra.ing a line
connectingthe highs of the "rice chart.
An
u"ard line
is constructed by dra.ing a line
connecting thelos of the "rice chart.
反
Ú #
é
– B
：
(eadands(oulders 6Golume is important ininterpreting t(e data in terms of t(e (ead and s(oulders pattern)+double top+ triple top+ inverse (eadands(oulders+ double bottomand triple bottom,Page
)
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®"#
é
–B
：
Triangles 6
ÛÜd
suggests buying and selling pressure(ave become roug(ly equal temporarily)+ &ectangles6
Ýd
Flags and pennants refer to
Ýd
ÛÜd
that appear on short4term charts).
rice6based Indicators@
1)Moving average lines2)ollinger %ands are constructed %ased on the standard deviation of closing pricesover the last n periods. &6ontrarian strategy)
'scillators (
/
=Þ
/
–B
"'scillator charts can be used to identify convergence or divergence of the oscillator and mar)et prices. *onvergence suggests the price trend is li)ely to continue, whiledivergence may indicate a potential change in the price chart.
) *6 &%uy when it changes from negative to positive during an uptrend in prices,and vice versa).!) *
SI 6T(e relative strengt( inde' 6&SI) is a momentum oscillatorand provides information on .(et(er or not an asset is overboug(tor oversold, An &SI greater t(an >J indicates t(at a stoc4 isoverboug(t an &SI lo.er t(an #J suggests t(at a stoc4 is oversold),
#) MA6" &MA6" line cross a%ove the signal line is a %uy, MA6" is the difference %etween two e9ponentially smoothed moving average of the price, and the signal lineis an e9ponentially smoothed moving average of MA6" line)') tochastic oscillator uses two lines that are %ounded %y G and 1GG5 it is used toidentify over%ought and oversold mar-ets.
8on6price6based indicators
+utcall ratio &
反$
–B
), $, Margin de%t &
i$
–B
), hort interest ratio &
-)‡
)
¾期
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T&I*K6advanced issuesEdeclining issues)E6Golume of advancing issuesEvolume of declining issues) A value belo. 1 isbullis( as it means more volume is in rising s(ares t(an in decliningones,;utual fund cas( position 6
反$
–B
)$+ &
反$
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)
Xondratie
wave@ #!
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7ecennial t(eory: 3
T‹
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±
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G
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D presidential cycle theory@
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$lliott .ave t(eory 6Fibonacci ratio): in a prevailing uptrend+ up.ardmoves in prices consist of 3 .aves and do.n.ard moves occur in #.aves, In a prevailing do.ntrend+ do.n.ard moves in prices consistof 3 .aves and up.ard moves occur in # .aves,Intermar4et analysis: &SIPage
)+
of
1+
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1)ascending price auctionE$nglis( auction
Lâìí
!)sealed bid auction
ïðIâìí
T(e term reservation price refers to t(e (ig(est price t(at abidder is .illing to pay,
Ç1
·
*人»˜"
#)second price sealed bid auctionEGic4rey auction
+ñâïðIâìí
T(ere is no reason for a bidder to bid less t(an (is reservationprice, T(e eventual outcome is muc( li4e t(at of 61),%)descending price auctionE
$utch auction
òâìí
If /rst bidder agrees to buy t(ree of ten units at Z1JJ+subsequent bidders .ill get t(e remaining units at lo.er prices,
„¸¹
·
*人P£
âã
ü½P
óâ
+
P
ô
ÿ
,"it( 0S treasury securities+ a single price auction is (eld but biddersmay also submit
a noncom"etitive ,id
, Suc( a bid indicates t(att(ose bidders .ill accept t(e amount of treasuries indicated at t(eprice determined by t(e auction,Figure: ConsumerEproducer Surplus"e assume t(at t(e demand curve represents t(e marginal socialbene/t curve t(e supply curve represents t(e marginal social costcurve, Producer surplus K revenue variable costs7ead.eig(t loss: t(e reduction in consumer and producer surplusdue to underproduction or overproduction, 7"
0áZ%理
õabö
ÃQV，
÷
p
q
å
,
bstacles to t(e ecient allocation of productive resources1)Price controls1,1)Price ceiling 6
ø
4
underproduction)If t(e ceiling is above t(e equilibrium+ it .ill (ave no eect,If it is belo. t(e equilibrium price+ please see belo.,Page
)%
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Producers often respond by reducing t(e quality of goods,
uê
1#;)&
"
l…d
GH，本»s%
"roducer sur"lus
，„Ã
"rice ceiling
，
¡
½
consumer sur"lus
,
1,!) Price <oor 6
ø
4
overproduction)If t(e <oor is belo. t(e equilibrium+ it .ill (ave no eect,If it is above t(e equilibrium price+ please see belo.,!)ta' and trade restrictions+ suc( as subsidies6
ù
”
Ÿ=Q
F
) andquotas 6
ù
”
Ÿ=Q†
)!,1) Ta't(e actual ta' incidence 6
实际úû
)is independent of .(et(er t(egovernment imposes t(e ta' 6statutory incidence
_
üúû
) onconsumers or suppliers,
0a8
ý
s
æç
$
Aþ
，
ý
d
æç
$¶
þ
,
œç越ÿ
(
;越0
(
承担
"
税负
越
Q
.
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As t(e elasticity of eit(er demand or supply decreases+ t(e 7"is also reduced, 6
$=
"
Ÿ
ä
•
0
½—„
达
zP
优
Ÿ=
) T(e trade price s(ould be t(e same .(et(er t(e ta' is imposedon t(e buyer or on t(e seller,!,!) Subsidies and Yuotassubsidies
¤
贴á
厂
·
ø
4
supply curve
$
ÑN
.
è
/
,
Producers often seek the im"osition of 9uotas ,ecause atthe 9uota amount( marginal ,ene5t e8ceeds marginalcost.
#)e'ternal costs 6
Ÿ=Q
F
)
，
1©G
副
¬用
却
-用
-
ù，
M
Fä
Ÿ@
%)e'ternal bene/ts6
Ÿ=Qó
)
，
1©G
l
效
应
却
—
Ô
处
，
Ž
Vä
Ÿ@
3)Public goods6
Ÿ=Q
V
+free rider) and common resources, 6
捕鱼
+
Ÿ=Q%
)1)Price $lasticity of 7emand
Öõ
6')
"
âã
6y)
弹
;
,
‚
谓
;
，wÖõd
âã¡Ã
"
敏感
%
,
1,1)
ëì
弹
;
Öõ
+
âã¡Ãz%影响
Öõ
6
„
ƒ代à
"¸¹
)
A product!s demand is elastic if demand increases b" a greater percentage than the percentage price cut hen prices are cut.
1,!)
ëì
无弹
;
Öõ
+
âã¡Ã
-
影响
Öõ
6
无
ƒ代à
"¸¹
)
Öõ
弹
;™
非
Öõ
æç
"
斜
率
+unit elastic
"¸¹
+total revenue
PF
+
C¶
e
：
1,#)t(er factors aect demand elasticity1,#,1) Portion of income spent on a good,
âã越ñ
+
弹
;越
F
6
;
F
+
w½
å
&'6[\-6
x
)商
à
)1,#,!) Time
Ó整¸ß
越
F，
表
明
弹
;越
F
1,%)
/alculation
î
X
01,
!½
elastic
X
1,
!½
inelastic
ñ
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)
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+P
＝
+
(
+
1
+
+
2
)/
2
P
(
P
1
+
P
2
)/
2
!) Income $lasticity of 7emand
Öõ
6')
"
收
入
6y)
弹
;
!,1)
<ormal goods
: an increase in income leads to an increasein quantity demanded,!,!)
nferior goods
: an increase in income leads to a decreasein quantity demanded,#) Cross Price $lasticity of 7emand 6
Öõ"Ø
叉
âã
弹
;
) T(e rate of t(e percentage c(ange in t(e quantity demanded of agood to t(e percentage c(ange in t(e price of a related good,#,1)Substitutes: .(en an increase in t(e price of a related goodincreases demand for a good+ .e say t(e t.o goods aresubstitutes6
l
"Öõ"Ø
叉
âã
弹
;
),#,!)Complements: .(en an increase in t(e price of a relatedgood decreases demand for a good+ .e say t(e t.o goodsare complements6
负
"Öõ"Ø
叉
âã
弹
;
),#,#)verall+ t(e price elasticity of demand is more positive t(ebetter substitute t.o good are and more negative t(ebetter complements t(e t.o good are,
gè：
,+,P
＝
,++, P P
＝
P+
∗(
,+,P
)
l
2中
,+, P
w½Öõ
æç
"
斜
率
Reading 1 $emand and Su""l! 'nal!sis: Consumer $emand
0tility t(eory is an important aspect of consumer c(oice t(eory+.(ic( related consumers- .ants and preferences to t(e goods andservices t(ey actually buy,
7tilit! theor! is consistent ith the e8istence of a /iDengood.7tilit! is an ordinal G
)
A measure( rather than a cardinal G
基
A measure.
"e can state .(ic( one is preferred+ but .e cannotstate by (o. muc(,Indierence curves plot t(e combinations of t.o goods t(at provideequal utility to a consumer, Certain rules:1)Indierence curves for t.o goods slope do.n.ard,Page
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!)Indierence curves are conve' to.ards t(e origin, T(e slope of an indierence curve at any point is referred to as t(e marginalrate of substitution, T(e c(aracteristic conve'ity of indierencecurves re<ects a diminis(ing marginal rate of substitution,#)Indierence curves cannot cross,
效
用
传
ù
t(e a'iom of transitivepreferences,2udget constraint 6
×’
êA
0
数=
，-0
âã
，
斜
率
0
yE'):$quilibrium bundle of goods 6
ü
ë
商
à¯
Í
):substitution eect:
ƒ代
效
应
)‡½
l
income effect@
收
入效
应
b
l
b
负
‹
ƒ代
效
应
½
l
,
而
收
入效
应
½
负
™š
F%
ƒ代
效
应
"¸¹
,
/
±)种违反Öõ
£
"
ab
,
w
9
商
àâã
¶
ò
反
而
òó
ÃÖõ
.1)(ormal good@ positive income effect2)$nferior good@ negative income effectEiffen good@
负
"
收
入效
应
F%
l
"
ƒ代
效
应
. A Eiffen good is theoretical andwould have an upward4sloping demand curve.) e%len good &
奢侈
à
), a higher price ma-es the good more desira%le. e%len
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good
0
¹实
²"
and have an upward4sloping demand curve.
Reading 1+ $emand and Su""l! 'nal!sis: 0he5rm
1) Accounting pro/t 6
cover
显
;
4本
)K total revenue totalaccountingEe'plicit 6
显
;
)costsAccounting costs include t(e interest cost on debt /nancing butnot any payments to t(e /rm-s equity o.ners as a return ont(eir invested capital,!) $conomic pro/tEabnormal pro/t 6
Z
cover
隐
;
4本，)
€
½
&
)Kaccounting pro/t implicit 6
隐
;
) costs K Total revenue totaleconomic costs Total economic costs include bot( implicit and e'plicit costs#)normal pro/t 6
争取
½
l
)K accounting pro/t t(at ma4es
economic"ro5t >ero
+
I@%
隐
;r
4本
, T(e important t(ing is t(at
an economic "ro5t of >ero Gnormal"ro5tA is hat e e8"ect in e9uili,rium.
verall+ earning a positive economic pro/t .ill increase t(e value of a /rm-s equity+ and negative economic pro/t .ill decrease t(e valueof a /rm-s equity,$conomic rent is used to describe a payment to a factor of production above its opportunity cost,In a perfectly competitive mar4et+ an increase in supply by a single/rm .ill not aect price,For a /rm in a perfectly competitive mar4et+ Average&evenueK;arginal &evenueKPriceFirms t(at face
donard;slo"ing demand curves
are referredto as
"rice searchers
, Factors of production:1)and !) abor #) Capital or PP[$ %) ;aterialsPage
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Important relations(ips as s(o.n in /gure above:1)AFC slopes do.n.ard,!)T(e vertical distance bet.een t(e ATC and AGC curves is equal toAFC,#);C decreases initially+ t(en increase,
't lo out"ut9uantities( e?ciencies are reali>ed from thes"eciali>ation of la,or. 4oever( as more and more la,oris added( MC increases due to diminishing returns.
%);C intersects AGC and ATC at t(eir minimum points,3)ATC and AGC are 0s(aped,5);inimum point on t(e ATC curve represents t(e lo.est cost perunit+ but it is not necessarily t(e pro/tma'imiing point, Itmeans t(e /rm is
ma8imi>ing "ro5t "er unit
at t(at point,>)T(e ;C curve above AGC is t(e /rm-s s(ortrun supply curve in aperfectly competitive mar4et,7etermine brea4even and s(utdo.n points1)0nder perfect competition1,1)if
'R
-
ATC+ t(e /rm s(ould stay in t(e mar4et in bot( t(es(ort and long run1,!)If ATC R A&
-
AGC+ t(e /rm s(ould stay in t(e mar4et int(e s(ort run but .ill e'it t(e mar4et in t(e long run,1,#)If
'R
AGC+ t(e /rm s(ould s(ut do.n in t(e s(ort run ande'it t(e mar4et in t(e long run,!)0nder imperfect competition+ because price does not equalaverage revenue 6or ;&) for a /rm in imperfect competition+analysis
,ased on total costs and revenues
is better suitedfor e'amining brea4do.n and s(utdo.n points, T(e conditionsare:
).1A 0R
KTC+ brea4even
).)A
TC R
0R
R TGC+ /rm s(ould continue to operate in t(ePage
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s(ort run but s(utdo.n in t(e long run
).3A 0R
TGC+ /rm s(ould s(ut do.n in t(e ST and T run,;arginal and average product curves7etermine t(e pro/tma'imiing level of output1) 0nder perfect competition 6priceK;&)1,1)Producing up to t(e point .(ere
MRMC
and notproducing additional units for .(ic( ;& ;C,1,!)Producing t(e quantity for .(ic(
0R;0C
is at a ma'imum,For a /rm t(at is
o"erating at MRMC ,ut is selling at a "rice,elo '@C
+ s(utting do.n is really t(e pro/tma'imiing decisionin t(e ST and T run,!) 0nder Imperfect Competition 6;&Price)Produce t(e quantity of output for .(ic(
MRMC
+ t(e samequantity for .(ic( T& TC is at its ma'imum,In t(e s(ort run+ for a given plant sie+ producing up to t(e quantity.(ere ;& K ;C .ill ma'imie pro/ts as long as price at t(e outputquantity is greater t(an AGC,Some notes for t(e grap( belo.:1) Y#Kminimum ecient scale!) YY#: economies of scale+ a /rm operating .it( economies of scale can increase its competitiveness by e'panding production andreducing costs,#) YRY#: diseconomies of scale+ A /rm operating underdiseconomies of scale .ill .ant to decrease output and move bac4to.ard t(e minimum ecient scale,%) Constant returns to scale: t(ere may be relatively <at portion att(e bottom of t(e &ATC curve,Page
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ncreasing;cost industr!
: t(e longrun supply curve for t(eindustry is
u"ard slo"ing
6oil is an e'ample)
$ecreasing;cost industr!
: t(e longrun industry supply curve is
donard slo"ing
6<atpanel television is an e'ample)Constantcost industry: t(e industry demand curve is perfectlyelastic at minimum average cost, T(e longrun industry supply curve is perfectly elastic at t(e ATC fort(e minimum ecient scale, T(is result .ill (old only if t(e cost of t(e /rms- input is constant as t(e industry e'pands output,2elo. point moved from 1
!
#1) For analysis+ t(e usefulness of t(e total product measure islimited!) Average product is a measure of overall eciency+ not t(eeciency of any one .or4er,Page
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#)
Marginal "roduct G
越
F
越Ô
A
is a better measure of t(eproductivity of an individual .or4er and is preferred over averageproduct or total product, A /rm e'periencing an increase in t(emarginal product of labor employed .ould most li4ely to allo. anincreased number of .or4ers to specialie and become more adeptat t(eir individual functions,Increasing t(e quantity of capital for a given quantity of labor .ill at/rst result in increasing marginal returns to capital+ (o.ever+employing additional units of capital .ill result in smaller increasesin output, T(is is t(e point of
diminishing marginal returns toca"ital.
For a /rm .it( * productive inputs+
cost minimi>ation
requirest(at:
.P
1
P
1
=
.P
2
P
2
=
/
=
.P
0
P
0
6;PKmarginal product+ PKprice+
gè中
&
+½
&
ä
Ÿ
6
素
+
ZC
labor+ capital);PEP
ë=
Ýä
Ÿ
6
素
"
Ÿà数=
，
越
F˜明
越
„
效
率
，
应É
QÈ
!
6
å
diminis(ing marginal productivity)
0o ma8imi>e "ro5ts
+ it requires t(at:
.P
1
∗
.R
output
P
1
=
.P
2
∗
.R
output
P
2
=
/
=
.P
0
∗
.R
output
P
0
or
.RP
1
P
1
=
.RP
2
P
2
=
/
=
.PR
0
P
0
=
1
2中
;&P K marginal revenue product 6
ŸàS收
入
)+ P
½
input price,
Reading 1# 0he 5rm and Market Structures
1)perfect competition6price ta4er)
âã3²Õ
†‡
!)monopolistic competition
"
h
#争
products are not identical#)oligopoly mar4et
$%"
h
only a fe. /rms competing+ suc( /rmsare interdependent+ barriers to entry are (ig(%);onopoly
ëì
"
h
a single seller of a product .it( no closesubstitutes, Oig( barriers to entry
+A
*atural monopoly
΢
"
h
e'amples are
electric "oer anddistri,ution ,usiness and other "u,lic utilities.
1) Perfect CompetitionIn s(ortrun+ economic pro/t is ma'imied at t(e quantity for .(ic(Page
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;&K;CIn longrun equilibrium+ eac( /rm is producing t(e quantify for .(ic(
PMRMC'0C
+ so t(at
all 5rms earn normal "ro5t G>eroeconomic "ro5ts( and 5rms can sta! in the ,usiness in thelong runA and each 5rm is "roducing the 9uantit! for hich'0C is a minimum.
e
6b)
½
²Õ
"
¾期
供
áæç
In belo. grap(+ a permanent c(ange in demand+ 7
J
7
1
+ t(e priceincreases from P
J
to P
1
+ e'isting /rm realie economic pro/t+ .(ic(attracts more /rms to enter t(e industry+ t(en S
J
S
1
+ pricedecreases bac4 to P
J
,!) ;onopolistic CompetitionFirms in monopolistic competition face do.n.ardsloping demandcurves 6price searc(), Page
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Product innovation is a necessary activity as /rms in monopolisticcompetition pursue economic pro/ts, Firms t(at bring ne. andinnovative products to t(e mar4et are confronted .it( lesselasticdemand curves+ enabling t(em to increase price and earn economicpro/ts,A /rm is considered to be spending t(e optimal amount oninnovation .(en
the marginal cost of innovation Kust e9ualsthe marginal revenue of additional innovation.'dvertising e8"enses are high
for /rms in monopolisticcompetition, ;any /rms spend a signi/cant portion of t(eiradvertising budget on brand name promotion,#) ligopoly T(e actions of anot(er /rm .ill directly aect a given /rm-s demandcurve for t(e product,#,1) Xin4ed demand curve model2ased on t(e assumption t(at
#争
1
&'
7òâ
-
'
7
(
â
Y
4
is t(e pro/t ma'imiing level of output,S(ortcoming: .(at determines t(e mar4et price 6.(ere t(e 4in4is located) is outside t(e scope of t(e model)#,!) Cournot model+ an early version of strategic games#,#) *as( equilibrium is reac(ed .(en t(e c(oices of all /rms aresuc( t(at t(ere is no ot(er c(oice t(at ma4es any /rm better o,In general+ collusive agreements to increase price in an oligopoly.ill be more successful 6(ave less c(eating) .(en 6
Ÿà
i
)
，
处*+
重
):#,#,1)T(ere are fe.er /rms#,#,!)Products are more similar 6less dierentiated)#,#,#)Cost structures are more similar#,#,%)Purc(ases are relatively small and frequentPage
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#,#,3)&etaliation by ot(er /rms for c(eating is more certain andmore severe#,#,5)T(ere is less actual or potential competition from /rmsoutside t(e cartel,#,%) dominant /rm model
优,厂
商
-
é
T(ere is a single /rm t(at (as a signi/cant large mar4et s(arebecause of its greater scale and lo.er cost structure, A price decrease by one of t(e competitive /rms .ill lead to adecrease in price by t(e dominant /rm+ and competitive /rms .illdecrease output andEor e'it t(e industry in t(e long run, T(e longrun result of suc( price decrease by competitors .ould
increasethe market share of the dominant 5rms
,In t(e long run+ t(e dominant company-s mar4et s(are tends todecrease as pro/ts attract entry by ot(er companies,%) ;onopoly 6
ëì
"
h
) T.o pricing strategies: singleprice+ price discrimination T(e pro/t ma'imiing output for a monopolistic /rm is t(e one for.(ic(
MRMC.
;onopolists are
"rice searches
and (ave imperfect informationregarding mar4et demand, "it( price discrimination+ t(e motivation for a monopolist is to
ca"ture more consumer sur"lus as economic "ro5t than is"ossi,le
by c(arging a single price,"(en compared to a perfectly competitive industry+ t(e monopoly/rm .ill produce less output and c(arge a (ig(er price,;onopoly is considered
ine?cient
as it creates a 7" relative toperfect competition because monopolies produce a quantity t(atdoes not ma'imie t(e sum of consumer surplus and producersurplus, A furt(er loss of eciency results from
rent seeking
.(enproducers spend time and resources to try to acquire or establis( amonopoly,Page
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=ith "erfect "rice discrimination( there ould ,e noconsumer sur"lus.
;onopolists .ould capture it all,
'mono"olist ould "roduce the same 9uantit! as under"erfect com"etition.
A government entity t(at regulates an aut(oried monopoly .illmost li4ely base regulated prices on long run average cost,3) *atural ;onopoly
=hen the average cost of "roduction for a single 5rm isfalling throughout the relevant range of consumer demand
+.e say t(at t(e industry is a natural monopoly,
+.1A 'verage cost "ricing
is t(e most common form of regulation, T(is .ill:3,1,1)Increase output and decrease price3,1,!)Increase social .elfare 6allocate eciency)3,1,#)$nsure t(e monopolist a normal pro/t because
"rice'0C+.)A Marginal cost "ricing Ge?cient regulationA
T(is .ill:3,!,1)Increase output and decrease price3,!,!)Cause t(e monopolist to incur a loss because
"rice '0C
,3,!,#)T(is solution
re9uires a government su,sid!
inorder to provide t(e /rm .it( a normal pro/t andprevent it from leaving t(e mar4et entirely,3,#)Anot(er .ay of regulating a monopoly is for t(egovernment to sell t(e monopoly rig(t to t(e (ig(estbidder,In mar4ets c(aracteried as monopolistic competition+ oligopoly+ andmonopoly+ t(ere is
no ell;de5ned su""l! function
, Page
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n each case( the 9uantit! su""lied is determined ,! theintersection of MC and MR( and the "rice charged isdetermined ,! the demand curve.
Pricing strategy under eac( mar4et structure1)Perfect competition;&K;CKP!);onopolistic competition;&K;CP#);onopoly;&K;CP%)ligopoly%,1) Xin4ed demand curve: ;&K;C%,!) Collusion: ;&K;C and c(arge t(e price from t(e industrydemand curve at .(ic( t(at quantity can be sold,%,#) 7ominant /rm model: ;&K;C and c(arge t(e price on its/rm demand curve for t(at quantity, t(er /rms ta4e t(e price asgiven,%,%) 8ame t(eory;&KP611E$
p
) $
p
is the price elasticity of demand
Concentration measures for a mar4et or industry are very oftenused as an indicator of mar4et po.er,1)*/rm concentration ratio+
缺点
0
relatively insensitive to mergersof t.o /rms .it( large mar4et s(ares,!)OOI+ calculated as t(e sum of t(e squares of t(e mar4et s(ares of t(e largest /rms in t(e mar4et, OOI values belo. 1JJ indicate t(emar4et is (ig(ly competitive,
c
A
两种
…§
"
Ë
i
缺点
0
,arriers to entr! are not considered
,
3arket 4tructure 5egree of !roduct
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5i+erentiation
1erfect competition +price taker 2omogeneous% standardizedMonopolistic competition +price searcherDierentiated3ligopol" +price maker 2omogeneous% standardizedMonopol" +price searcher, donard-sloping demand curve4nique product 1erfect competition, 15M65A6
Reading 1% 'ggregate 6ut"ut( Prices( and Economic groth
87P is t(e total mar4et value of t(e goods and services produced ina country .it(in a certain time period, 87P included only purc(aseof ne.ly produced goods and services,
tems those are included in /$P:
1)8oods and services provided by government!)T(e value of
oner;occu"ied housing.tems those are e8cluded in /$P:1A0he sale or resale of goods "roduced in "revious "eriods
!)
0ransfer "a!ments
made by t(e government are not economicoutput and
are not included
in t(e calculation of 87P,#)T(e value of labor not sold+ suc( as a (omeo.ner-s repairs to (iso.n (ome+ is not included in 87P,%)2yproducts of production+ suc( as
environment damage
+ arenot included in 87P,
./
6domestic)
0
0
'y
1
”
!yÿ"
+
(62
«¬
2
/0
31456
+
-B0本Ü
789
0©Ü
78
6yÿ²
6
@
.:
6national)
0
0
'y
8
”
!yÿ"
+
(60本Ü
78
+
-Bä
2
²本Ü
9
0©Ü
+
2
«¬
2
/
6yÿ²
6
,$'penditure approac(: 87P is calculated by summing t(e amounts
s"ent
on goods and services produced during t(e periodPage
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Income approac(: 87P is calculated by summing t(e amounts
earned ,! households and com"anies
during t(e period+i
ncluding age income( interest income( and ,usiness"ro5ts.
Galueof/naloutput met(od: t(e calculation of 87P under t(ee'penditure approac(Sumofvalueadded met(od: sum t(e additions to value created ateac( stage of production and distribution,*ominal 87P: t(e total value of all goods and services produced byan economy+ valued at current mar4et price,&eal 87P is calculated relative to a base year,
1DPdeflator
=
nominal1DPreal1DP
=
Current 2ear price
∗
Current 2ear3uantit2 prior 2ear price
∗
Curren2 2ear3uantit2
Per;ca"ital real /$P
is de/ned as real 87P divided by populationand is often used as a measure of t(e economic .ell being of acountry-s residents,0nder t(e e'penditure approac(+
/$PC/GO;MA ;;;;;;;;;; G1A
0nder t(e income approac(+87PKnational income L capital consumption allo.ance L statisticaldiscrepancy1) CCA measures t(e depreciation of p(ysical capital from t(eproduction of goods and services over a period,!) *ational income is t(e sum of t(e income received by allfactors of production t(at go into t(e creation of /nal output,#) Personal income is a measure of t(e preta' income receivedby (ouse(olds and is one determinant of consumer purc(asingpo.er and consumption,Personal income K national incomeL Transfer payments to (ouse(olds
;
Indirect business
ta8es
Corporate income
ta8es;7ndistri,uted cor"orate "ro5ts
Personal disposable income 6P7I) K personal income personalta'0nder t(e income approac(+
/$PCS0
6!)Combine 61) and 6!)
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As belo.+ (ig(er rates .ill decrease t(e real aggregate income, T(eIS curve 6
L资\
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æç
) plots t(e combinations of
income and real
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interest rates
for .(ic( aggregate output and income equalplanned e'penditure,Yuantity t(eory of money: ;GKP T(e ; curve represents combinations of income and t(e interestrate at .(ic( t(e demand for real money balance equals t(e supply, T(e aggregate demand curve s(o.s t(e relations(ip bet.een t(equantity of real output demanded 6.(ic( equals real income) andt(e price level, T(e aggregate supply curve describes t(e relations(ip bet.een
the"rice level and the 9uantit! of real /$P
supplied,In t(e long run+ .ages and ot(er input prices c(ange proportionallyto t(e price level+ so t(e price level (as no longrun eect onaggregate supply, "e refer to t(is level of output as
"otential /$Por full;em"lo!ment /$P
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T(e full employment 6
the intersect of R'S and 8 a8is
)+ ornatural+ level of output is a level .it( a modest+ stable pool of unemployed .or4ers 6
Ko, seekers e9ual Ko, vacancies
) loo4ingfor and transitioning into ne. 9obs,S(ift in t(e A7 curve*ote t(at a c(ange in t(e price level is represented+ as a movementalong t(e A7 curves+ not a s(ift in t(e A7 curve,
Consider /$PC / net O
1)Increase in consumers- .ealt( 6C increases as t(e value of (ouse(olds- .ealt( increases+ t(e proportion of income saveddecreases and spending increases+ increasing A7)
ealtheDect
!)2usiness e'pectation 6I increases)#)Consumer e'pectations of future income 6C increases)%)Oig( capacity utiliation 6I increases)3)$'pansionary monetary policy 6C and I increase)5)$'pansionary /scal policy 6C increases for ta' cut+ 8 increases forspending increase)>)e'c(ange rate 6
B
值LM/
í
)?)global economic gro.t( 6
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+
/
í
L
Q
)S(ifts in s(ortrun aggregate supply curve:1)abor productivity!)Input prices#)$'pectations of future output prices%)Ta'es and government subsidies3)e'c(ange rate 6
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Factors t(at aect t(e real output t(at an economy can produce atfull employment .ill s(ift t(e &AS curve,1)Increase in t(e supply and quality of labor!)Increase in t(e supply of natural resources#)Increase in t(e stoc4 of p(ysical capital%)Tec(nology"it( t(e price level at 113+ t(ere is e'cess supply t(is is sometimestermed a
recessionar! ga"
"it( t(e price level at 1J3+ t(ere is e'cess demand t(is issometimes termed as an
in*ationar! ga"
,
c¶两
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+
ü½
S&AS
è
/
+
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output gap+
âã÷
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fullemployment 87P
"
ab
0
3
c(ange in A7
ø
4"
+ .(ic( is caused by c(anges in t(e moneysupply,
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/$P.
An increase in resources prices t(at cause S&AS to decrease 6s(ift tot(e left)Page
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A decrease in .ages and ot(er input prices increase s(ortrunaggregate supply 6move it do.n to t(e rig(t)Stag<ation 6
J K
) refers to an environment of bot( (ig(unemployment and increasing in<ation,
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12
.An investor anticipating stagflation should@1)"ecrease investment in F$"2)"ecrease investment in euities)$ncrease investment related to commodities
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Five sources of economic gro.t(1)abor supply!)Ouman capital#)P(ysical capital stoc4%)Tec(nology3)*atural resources
/roth in "otential /$P groth in la,or force groth inla,or "roductivit! Gcan ,e measured directl!( out"uthourA
T(e sustainable rate of economic gro.t( is important because longterm equity returns are (ig(ly dependent on economic gro.t( overtime,abor productivity can be increased by eit(er improving
technolog!
or
"h!sical ca"ital "er orker. 4oever(
becauseof
diminishing marginal "roductivit!
+ sustainable longtermgro.t( cannot necessarily be ac(ieved simply by increasingp(ysical capital per .or4er over time+
"roductivit! gains andgroth of the la,or force
are also necessary for longtermsustainable gro.t(,Solo. model or neoclassical model:
/roth in "otential /$Pgroth in technolog! =
Ggrothin la,orA =
C
Ggroth in ca"italA G
2
实
r01
A:
gè"H
Q
A=
and =
C
are la,orFs "ercentage share of national incomeand ca"italFs "ercentage share of national income.'n increase in total factor "roductivit! re*ects an increasein out"ut for given in"uts.
Reading 12 7nderstanding Business C!cle
Real /$P and unem"lo!ment rate
are t(e 4ey variables used todetermine t(e current p(ase of t(e cycle,Page
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A common rule of t(umb is to consider t.o consecutive quarters of gro.t( in real 87P as t(e beginning of an e'pansion and t.oconsecutive quarters of declining real 87P as indicating t(ebeginning of a contraction,
R
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ª
45
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6
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3
private corporations,&esource use <uctuation1)"(en an e'pansion is approac(ing its pea4+ sales gro.t(begins to slo.+ and unsold inventories accumulate, T(is canbe seen in
an increase
in t(e
inventor!;sales ratio
a,oveits normal level
, !)T(e opposite occurs .(en a contraction reac(es its troug(+
inventor!;sales
ratio
decreases ,elo its normal level
,nly .(en an e'pansion or contraction appears li4ely topersist .ill t(ey (ire or lay o .or4ers,Oousing sector activity1);ortgage rates!)Oousing costs relative to income#)Speculative activity%)7emograp(ic factors$'ternal trade sector activity1)7omestic 87P gro.t(!)87P gro.t( of trading partners#)Currency e'c(ange rate Typical business cycle c(aracteristics:1)Troug(
Moderate or decreasing in*ation rate
Spending on consumer durable goods and (ousing may increaseIncreasing use of overtime and temporary .or4ers!)$'pansion&eal 87P is increasingIn<ation rate may increaseInvestment increases in producers- equipment and (omeconstruction#)Pea4
Real /$P sto"s increasing and ,egins decreasing7nem"lo!ment rate decreases ,ut hiring slosn*ation rate increases
Consumer spending and business investment
gro at sloerrates
%)Contraction87P gro.t( rate is negative0nemployment rate increases
n*ation rate decreases
.it( a lagPage
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eading indicator1)0nemployment insurance initial claims!)IS; ne. orders#)2uilding permits%)Stoc4 price3)I& spreadCoincident indicator1)*onfarm payroll!)Industrial production#);anufacturing and trade salesagging indicator1)CPI!)abor cost#)InventoryEsale ratio%)CommercialEindustrial loans2ased on typical
la,or utili>ation "atterns
across t(e businesscycle+
"roductivit!
6output per (ours .or4ed) is mostly li4ely to be
highest at the ,ottom of a recession.
1) *eoclassical sc(ool
¼
TU
学
VWW
F
X
¾
YZ
2ot( aggregate demand and aggregate supply are primarilydriven by c(anges in
technolog!
over time, T(ey conclude t(atbusiness cycle is temporary deviations from longrunequilibrium,!) Xeynesian sc(ool 62ernan4e) believed t(at s(ifts in aggregatedemand due to c(anges in e'pectations .ere t(e primary cause of business cycle,
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;onetarist sc(ool
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)
f
^
, T(ey
favoreda limited role for government ,ecause the! arguegovernment "olicies o"erate ith a lag.
!) Austrian school
_
Ü…学
V
,elieve ,usiness c!cles are caused ,!government intervention
in t(e economy,
#) (ew classical school
¼
TU
学
V
introduced
real business cycle theory
¹实»期
理
ª
;
反1
[;
Ž
45
u
W
) the policyma-ers
should not try to counteractbusiness cycles
%ecause e9pansions and contractions are efficient mar-et responses toreal e9ternal shoc-s.1)Frictional unemployment 2)tructural unemployment:he unemployed wor-ers do not currently have the s-ills needed to perform the 3o%s that are availa%le.)6yclical unemployment is caused %y changes in the general level of economicactivity. 1)A person who is not wor-ing is considered to %e unemployed if he is activelysearching for wor-. ne who has %een see-ing wor- unsuccessfully for
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ill decrease the unit labor cost. As the unit labor cost decreases,cost-push in7ation decreases
«资
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Analysts use
labor productivity
to identity signals of potential wage pressure. Bageincreases are not inflationary as long as they remain in line with gains in productivity.
8on6accelerating inflation rate of unemployment ;8AI9-)0 also called thenatural rate of unemployment ;8A9-)1
΢
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l
full employment
—„
T
g
;
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2)
$emand6pull
inflation results from
an increase in the money supply0 increasedgovernment spending0 or any other change that increases governmentspending1
"emand4pull inflation would persist until the central %an- reduced the growth rateof the money supply and allowed the economy to return to full employmenteuili%rium at a level of real E"+ eual to potential E"+./conomists often use the
capacity utiliation rate of industry
to indicate the potential for demand4pull inflation.Falling unemployment rate puts upward pressure on real wages, which result in adecrease in *A.:he impact on output is the -ey difference %etween demand4pull and cost4push
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effects.
he demand6pull effect increases $ above full6employment $0
while with
cost6push inflationB a decrease in aggregate supply initiallydecreases $1
Reading 1 Monetar! and -iscal Polic!
;oney (as t(ree primary functions:1);edium of e'c(angeEmeans of payment!)unit of account
y
â
Ý
#)Store of value*arro. money is t(e amount of notes and coins in circulation in aneconomy plus balances in c(ec4able ban4 deposits,2road money included narro. money plus any amount available inliquid assets+ .(ic( can be used to ma4e purc(ases,
¿ü45
Z
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ü45
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流
/
;0
mone2multiplier
=
1
reservere3uirement
=
1
+
CD RR
+
CD
;oney supply Q velocity K price Q output 6
M@PT( T
½l
real /$P
) T(e belief t(at output 687P) and velocity are not aected bymonetary variables 6money supply and prices) is referred to as
mone! neutralit!.
T(ree reasons for (olding money:Page
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1)transaction demand+
¹实
E"+
4
l
Z
!)precautionary demand+
¹实
E"+
4
l
Z
3A
Speculative demand+ it is
inversel! related to market returnsand "ositivel! related to risks.
T(e supply of money is determined by t(e central ban4 and isindependent of t(e interest rate+
‚
c¶
e
中0
i
ç
At I
(ig(
+ t(ere is e'cess supply of money+ /rms and (ouse(olds are(olding more real money balances t(an t(ey desire to, At I
lo.
t(ere ise'cess demand for real money balances+ /rms and (ouse(olds .illsell securities to increase t(eir money balance to desired level,Fis(er eect:
R
0om
=
R
Real
+
E
[
4
]
T(e real interest rate is relatively stable t(is is consistent .it(money neutrality
D
)þÜ
+
R
0om
=
R
Real
+
E
[
4
]
+
RP
6&P K ris4 premium for uncertainty)Xey roles of central ban4s1)Sole supplier of currency, ;oney not bac4ed by any tangiblevalue is termed /at money,!)2an4er to t(e government and ot(er ban4s#)&egulator and supervisor of payments system%)ender of last resort3)Oolder of gold and foreign e'c(ange reserves5)Conductor of monetary policy T(e primary goal of a central ban4 is to
control in*ation
, Oig(in<ation leads to menu costs and s(oe leat(er costs, T(e pegging country essentially commits to a policy intended toma4e its in<ation rate equal to t(e in<ation rate of t(e country to.(ic( t(ey peg t(eir currency,Costs of une'pected in<ation1)Oig(er borro.ing ratesPage
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monetary policy is said to be contractionary 6e'pansionary),6
"olic! rate
l
neutral rate
áZý
Ai9uidit! tra"
: A situation in .(ic( prevailing
interest rates arelo and savings rates are high
+ ma4ing monetary policyineective, In a liquidity trap+ consumers c(oose to 4eep t(eir fundsin savings because of t(e prevailing belief t(at interest rates .illsoon increase, 67e<ation L e'pansionary money supply policy)Compared to in<ation+ de<ation is more dicult for central ban4sbecause t(ey are limited to reducing t(e nominal policy rate to J,Fiscal policy refers to a government-s use of spending and ta'ationto meet macroeconomic goals, 1)Xeynesian economists believe t(at
5scal "olic!
+ t(roug( itseect on aggregate demand+ can (ave a strong eect oneconomic gro.t( .(en t(e economy is operating at less t(anfull employment,!)
45
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$iscretionar! 5scal "olic!
refers to t(e spending and ta'ingdecisions of a national government t(at are intended to stabilie t(eeconomy, In contrast+
automatic sta,ili>ers
6
Œ/
]
‡
器
+ in arecession+ ta' .ill fall+ and government spending on unemploymentinsurance .ill increase+ bot( of t(ese are e'pansionary) are builtin/scal devices triggered by t(e state of t(e economy, b9ectives of /scal policy:1)In<uencing t(e level of economic activity and aggregatedemand!)&edistributing .ealt( and income among segments of t(epopulation,#)Allocating resources among economic agents and sectors int(e economy,Fiscal policy tools1)Spending tools 6most ecient in increasing aggregatedemand) Transfer payments 6slo.)Current spendingCapital spending 6slo.) !) &evenue tools!,1)
$irect ta8es
6slo.) are levied on income or .ealt(,!,!)
ndirect ta8es
6quic4) are levied on goods and services,1)Advantage of /scal policy:1,1)Social policies 6discouraging
to,acco use
) can beimplemented very quic4ly via indirect ta'es,Page
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to increase your income by collecting t(e call option premium, T(ecall .riter is trading t(e stoc4-s upside potential for t(e callpremium,Protective put 6long stoc4+ long put)A protective put is an investment manager tec(nique designed toprotect a stoc4 from a decline in value, It is constructed by buying astoc4 and put option on t(at stoc4,
Reading #3 ntroduction to 'lternative nvestments
Alternative investments as a group (ave (ad lo. returnscorrelations .it( traditional investments, Compared to traditionalinvestments+ alternative investments e'(ibit:1)ess liquidity of assets (old!);ore specialiation by investment managers#)ess regulation and transparency%);ore problematic and less available (istorical return andvolatility data3)7ierent legal issues and ta' treatmentsAlternative investments1)Oedge fund+ t(ey do not necessarily (edge ris4s as t(e nameimply,!)Private $quity funds
3A
&eal $state includes
residential or commercial "ro"erties asell as real estate ,acked de,t.
%)Commodities3)t(er
Survivorshi" ,ias
refers to t(e up.ard bias of returns if data onlyfor currently e'isting /rms is included,
Back5ll ,ias
refers to bias introduced by including t(e previousperformance data for /rms recently added to a benc(mar4 inde',
4edge funds
i4e Private $quity fund+ (edge funds are typically set up as
limited"artnershi"
+ .it( t(e
investors as the limited "artners
,
0hemanagement 5rm is the general "artner
and typically receivesbot( a management fee based on t(e value of assets managed andan incentive fee based on fund returns,&estrictions on redemptions may include a
locku" "eriod and anotice "eriod
, A loc4up period is a time after initial investmentduring .(ic( .it(dra.als are not allo.ed, A notice period+ typically#J to @J days+ is t(e amount of time a fund (as after receiving aredemption request to ful/ll t(e request, Additional fees may bec(arged at redemption,Page
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Fund of funds managers 6
"rovide more due diligence and,etter redem"tion terms
) c(arge an additional layer of feesbeyond t(e fees c(arged by t(e individual (edge funds in t(eportfolio,Strategy1)$ventdriven strategies1,1);erger arbitrage1,!)7istressedErestructuring1,#)Activist s(are(olders1,%)Special situation!,&elative value strategies!,1)Convertible arbitrage!,!)Assetbac4ed /'ed income 6e'ploit pricing discrepanciesamong various ;2S or A2S,!,#)8eneral /'ed income!,%)Golatility 6e'ploit dierences bet.een returns volatilityimplied by options prices and manager e'pectations of future volatility),!,3);ultistrategy #,;acro strategies
.E9uit! hedge fund strategies
%,1);ar4et neutral 6select undervaluedEovervalued equities)%,!)Fundamental gro.t( 6use fundamental analysis to /nd(ig(gro.t( companies),%,#)Fundamental value 6use fundamental analysis to /ndundervalued companies)%,%)Yuantitative directional 6use tec(nical analysis)%,3)S(ort bias Oedge fund valuationOedge fund values are based on mar4et values for traded securitiesin t(eir portfolios+ but must use model values for nontradedsecurities,
Some funds calculate a trading <'@ using suchadKustments for illi9uidit!.
0rading <'@ is diDerent from thecalculated <'@ re9uired ,! accounting standards( hich is,ased on either market or model "rices.
Private E9uit!
T(e ma9ority of private equity invests eit(er in private companies orpublic companies t(ey tend to ta4e private+ or in early stagecompanies, T.o smaller categories are
distressed investmentfunds
and
develo"mental ca"ital funds
,Strategieseveraged buyouts+ .(ic( means primarily ban4 debt+ (ig(yieldbonds+ or meanine /nancing funds t(e purc(ase of t(e portfoliocompany, T.o types of 2s 6
5rms ith high cash *o( lo leverage and
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large amount of "h!sical assets
are attractive 2 candidates)1);2s+ in .(ic( t(e e'isting management team is involved in t(epurc(ase!);anagement buyins 6;2Is)+ in .(ic( an e'ternal managementteam .ill replace t(e e'isting management team,Genture capital funds invest in companies in t(e early stages of t(eirdevelopment, GC fund managers often
sit on their ,oards or5lling ke! management roles.
7ierent company stages:1)Formative stage
=.=Angel investing, often
the idea stage
, the funds are usedfor business plans and assessing market potential. &hefunding source is usuall" individuals rather than B' funds.
1,!)Seed stage refers to
the investments made for
product development, marketing and market research &
ŸàÄ
:
²Õž
)
.
T(is is typically t(e stage during .(ic( GCfunds ma4e initial investments+ t(roug( ordinary orconvertible preferred s(ares,
1.)
$arly stage refers to investments made to fund
initial commercial production and sales &
Ä
•
ä
Ÿ
).
!)ater stage, Funds are used for
e8"ansion
of production orsales,#);eanine /nancing refers to capital provided to prepare t(e /rmfor an IP,
Me>>anine 5nancing
refers to debt or preferreds(ares t(at are subordinate to t(e (ig(yield bonds issued andcarry .arrant or conversion features t(at give investorsparticipation in equity value increase,t(er strategies1)7evelopmental capital E minority equity investingE PIP$!)7istressed investing#)Investors often ta4e an active role in t(e turnaround by .or4ing.it( management,Private $quity Structure and FeesPrivate $quities are structured as
limited "artnershi"
,
3anagement fees are typically 1H to H of committed capital, rather than invested capital. <his is in contrast tohedge funds, for which the management fee is based oninvested capital.
Incentive fees are typically !J\ of pro/ts+ but
the fees are not earned until after the fund has returnedinvestorsF initial ca"ital.
Private $quity e'it strategies T(e average (olding period for companies in P$ portfolio is 3 years, 1)Trade sale 6sell to a competitor)!)IPPage
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#)&ecapitaliation%)Secondary sale 6sell to anot(er P$ /rm)3)"riteoEliquidationP$ portfolio company valuation1);ar4etEcomparable approac(!)7iscounted cas( <o. approac(#)Assetbased approac(
Real Estate
1)&esidential property single family (omes!)Commercial property produces income#);ortgage loansForms of &eal $state investment
1A
&esidential property is a direct investment in real estate, Propertypurc(ased .it( a mortgage is referred to a leveraged investmentand
the onerFs e9uit! is the "ro"ert! value minus theoutstanding loan amount.
!)Commercial real estateong time (orions+ illiquidity+ t(e large sie of investmentneeded+ and t(e comple'ity of t(e investments ma4e commercialreal estate inappropriate for many investors,#)&eal estate investment trusts %)Timberland 3)Farmland T(ree types of indices measure real estate performance:1)An appraisal inde' 6
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loest standard deviation
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),!)&epeat sales inde' 6an e'ample of sample selection bias)#)&$IT indices 6
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)#,1) ;ortgage &$IT does not invest in real estate directly, T(eyma4e real estate loans,#,!) $quity &$IT+ invest directly in properties,&$IT inde' returns and global equity returns (ave (ad a relativelystrong correlation, T(e correlation bet.een global bond returnsand &$IT returns (as been very lo. (istorically,&eal estate valuation1)Comparable sales approac(
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Commodities
Futures+ for.ards+ options+ and s.aps ot(er met(ods of e'posuresPage
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to commodities include:1)$TF!)$quities t(at are lin4ed to a commodity+ one potential dra.bac4are t(e price movement of a stoc4 and t(e commodity may notbe perfectly correlated,#);anaged future funds%)Individual managed accounts3)Specialied funds in speci/c commodity sectors&eturns and s(arp ratio for commodities (as been lo.er t(an stoc4sor bonds, Oolding commodities can act as a (edge of in<ation ris4,
S"ot "rices for commodities are a function of su""l! anddemand.
/ommodity futures price : 4pot price &1;8) ; storage costs B convenience yield
Convenience yield is t(e value of (aving t(e p(ysical commodity foruse over t(e period of t(e future contract, 6
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no convenience!ield
):1)&oll yield+ positive for a mar4et in bac4.ardation and negative fora mar4et in contango,!) Collateral yield#) C(ange in spot pricesC(anges in t(e underlying commodity-s price
least li4ely to bedirectly re<ected in t(e returns of commodity inde',t(er alternative investments&are .ines+ art+ rare coins and stamps+ valuable 9e.elry and.atc(es+ and sports memorabiliaOedge fund fees 6! and !J)1);anagement fee is based on invested capital+ rat(er t(ancommitted capital,!)Incentive fee
' hard hurdle rate
means incentive fees are earned only
onreturns in e8cess of the ,enchmark.' soft hurdle rate
means t(at incentive fees
are "aid on all"ro5ts( ,ut onl! if the hurdle rate is met.
A (ig( .ater mar4 T(e incentive fee is not paid on gains 9ust oset prior losses+ t(usincentive fees are only paid to t(e e'tent t(at t(e current value isabove t(e (ig(est value preciously recorded,Investors in funds of funds incur additional fees from t(e managersof t(e funds of funds, A 1\ management fee and a 1J\ incentivefee are c(arged in addition to any fees c(arged by t(e individualPage
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